WHAT ARE QUANT FUNDS?
A quant fund is a mutual fund that invests its assets baked on quantitative analysis. Quant funds are usually run passively based on predetermined factors and screens. Some investors are attracted to quant funds because they take emotion out of the decisions related to investments.
In this article, let us go over how these funds work and what types are available for investors.
DEFINITION
Quant funds are mutual funds managed via systematic or quantitative analysis that is based on computer algorithms and models instead of the qualitative option of a human manager. Some consider quant funds more superior to qualitative funds because there is no bias or emotion involved in the investment management decision, while others champion an investing approach that combines both qualitative and quantitative methods.
These funds are usually less expensive to manage as much of the investment process is automated once the original model or algorithm is built. Each step of the process is based on quantitative analysis and is done completely in a systematic way. The fund managers create the original model but later the computers do all the trading.
Fundamental or Qualitative value managers may do similar work on potential investments looking at the quality, valuation and earnings manipulation. But in place of using a wealth of data metrics or points, they might analyse what management says or use historical anecdotes to make any decision.
WORKING OF QUANT FUNDS
Many quant mutual funds employ factor investing. Factor investing is investing which is done based on predetermined factors such as momentum, size, dividend yield or value that are proven to beat the market average over a long tenure.
Some funds choose one or more of the well known aforementioned factors and invest based upon them, while others use their own proprietary research to add additional factors and screening it to introduce new ones.
Moreover, many qualitative funds use quantitative analysis. The manager can use factors to build a list of stocks to analyse and use qualitative analysis to opt on the best opportunity. Quantitative investing and strategy is ideal for ETFs (Exchange Traded Funds) because it is passive management but also a widely used strategy in hedge funds.
QUALITATIVE VS QUANTITATIVE ANALYSIS
Quantitative analysis is relatively a newcomer in the stock market world. AQR is considered a trailblazer and it is only 23 year old. Qualitative investors such as Warren Buffett were beating the market years before AQR came into picture.
Qualitative analysis, often referred to as fundamental analysis, is focused on developing subjective opinions about the long term suitability of the stock. A good thumb rule is that qualitative analysis is more of an art while quant analysis is more of a science. While many qualitative analysis consider quantitative factors, quant analysis doesn't consider any subjective information.
There is an argument that quant analysis is not good enough. For instance, if a stock is undervalued, it may be that way for a good reason such as the hire of a new executive or an overhaul of company culture that may lead to better performance. Quant analysis may have recommended investing in a company such as Yes Bank because it seemed undervalued while a qualitative analyst could see HDFC and Axis changing the industry.